Rating agencies and investors have warned that Mexican state oil company Pemex needs urgent government support to make upcoming payments on its debt of more than $100bn.
Moody’s lowered the outlook on its ratings on Pemex’s debt on Friday to “negative” from “stable” but left the sub-investment-grade ratings unchanged. That followed a rating downgrade from Fitch this month, pushing the company further into junk territory while noting Pemex was in “financial distress” and that it may need “concessions” from creditors.
The news intensifies pressure on the company and on Mexico’s government to communicate a long-term strategy for paying down its debt and navigating what Moody’s said would be pressure on public finances for support under a new government after next June’s election.
Many investors had expected direct government support for the company earlier this year, but Pemex instead tapped capital markets in January with a $2bn bond issuance.
The 10-year bond was priced with a yield of 10.375 per cent. That has since climbed to roughly 11.5 per cent, reflecting a decline in the debt instrument’s price.
Trading at just above 90 cents on the dollar on Monday, the bond’s price is still well above a level of 70 cents that is perceived to be a marker of distress. But Pemex also has longer-dated bonds, including one with a 2050 maturity, which trade below that threshold.
“It’s not really that sustainable when you have companies funding at 11, 12 per cent,” said one bondholder who did not wish to be named. “Typically it does indicate distress — and that’s the concern with this company.”
Pemex’s size means its debt is held by various emerging market funds — it makes up 1.9 per cent of the JPMorgan Emerging Market Bond Global Diversified Index — and it is one of Mexico’s largest employers.
President Andrés Manuel López Obrador, who cannot run again under the constitution, has vowed to “rescue” Pemex as part of a broader energy nationalism strategy to champion state groups and reduce reliance on foreign companies and suppliers.
The business turned its first annual net profit in a decade last year, helped by soaring oil prices, but analysts said it was still not on a sound footing and that its $107bn debt pile was unsustainable.
“Pemex is in a vulnerable position given tight liquidity and poor solvency metrics,” said Aaron Gifford, emerging markets sovereign analyst at T Rowe Price, one of Pemex’s largest bondholders. “Higher borrowing costs are also an issue and the lack of immediate government support has come as a disappointment.”
“Despite all of this, I still believe the government has the willingness and capacity to support the company.”
Differing views on how willing Mexico’s government is to support the company explain divergent ratings held by Moody’s and Fitch, which have assigned it “junk” or speculative-grade credit quality, and S&P Global Ratings, which gives it an investment-grade rating.
Mexico’s finance ministry in a statement said Pemex was a valuable strategic asset and the government had been and would continue to be responsible by supporting Pemex without negatively affecting public finances.
“We have the capacity to back the company whenever it is necessary,” the ministry said.
Pemex has to make some $15bn of international bond payments in 2023 and 2024. Moody’s noted it also has other, shorter-dated debt, totalling an additional $9bn.
In the past few years the government has cut a key tax rate on the company and bought back or swapped bonds, but to meet the next payments it will need further support, according to Fitch.
“Pemex cannot afford [to wait] for the next government to take action, Pemex needs assistance now,” said Saverio Minervini, senior director at the rating agency, adding that support had been ad hoc and unpredictable.
Pemex said it disagreed with Fitch’s downgrade, and that federal government support had been co-ordinated and unlike in any prior administration.
“Pemex is on a path to a more solid financial position,” the company said, adding that the assistance was not discretional and clearly aimed at supporting investment and strengthen its finances.
Even as Pemex pays lower interest costs on some of its older bonds, the investor pointed out that any future refinancing would be more expensive.
The bondholder also raised a commonly-held concern over why the government had not provided a greater level of support to bring funding costs down or fund out of sovereign issuance instead. “Ultimately, someone is paying a much higher interest cost here,” they said.
Investors have been warning for years that Pemex’s lack of progress on environmental, social and governance (ESG) metrics means more and more fund managers are screening it out of their portfolios. There have been multiple ESG-related incidents this year, including a platform fire that killed two workers in July and a February storage terminal fire that killed five.
Pemex said recent “relevant events” were related to third-party work that did not meet its standards, and that it was taking action to ensure contractors were adequately qualified and supervised.
Pemex, formed in 1938 after foreign oil companies were expropriated by the government, had a monopoly on the industry for more than 70 years until a 2013 opening to private companies. But the nationalist López Obrador halted the initiative’s implementation.
“The closing of the energy space to private investment puts more pressure on Pemex,” said Lisa Schineller, sovereign ratings managing director at S&P.
Schineller highlighted that Mexico had the capacity to support Pemex. Even if the oil company’s full debt was taken on by the sovereign, Mexico’s net general government debt would not exceed 60 per cent of gross domestic product.
The company is clearly “critical” for Mexico from a public employment, supply chain and economic perspective, making a default unlikely, she said, likening its relationship to the government to that of mortgage insurers Fannie Mae and Freddie Mac with the US government.
The Pemex bondholder added that two-year Pemex credit default swaps — insurance-like derivative products that pay out if a company reneges on its borrowers — were more expensive than one-year equivalents.
The difference in pricing was “quite steep”, they said, signalling hedging against “election risk” from next June.
